faq's on the improve act

The IMPROVE Act Frequently Asked Questions

The Improve Act is a complex bill that does great things. It uses the budget surplus to readjust tax rates in a way that will fund $10.5 billion dollars of state highway projects, provide the largest tax cut in the history of Tennessee and help us leverage the tax dollars we know that tourists, travelers and truckers pay while they're here in Tennessee.

The taxes that are decreased provide help for Tennessee families, and the decreases are twice as large as the gas tax increase that has made so much news.

The conservative Americans for Tax Reform scores the IMPROVE Act as a net tax cut. They understand realignments of tax rates are sometimes necessary to better benefit citizens. They issued a statement explaining that if the tax offsets produce a net reduction in taxes – which the IMPROVE Act does – then the General Assembly has not raised taxes.

Below are FAQ’s about the Improve Act. I have addressed the bill, the economic theory and even the fake news.

what is the improve act?

The Improve Act is Governor Haslam’s bill to provide funding for Tennessee’s backlog of road projects. There are 962 projects in all, totaling over $10.5 billion. Nine of the projects in the Improve Act are in Wilson County, totaling over $250 million.

HOW DOES THE IMPROVE ACT WORK?

The Improve Act adjusts Tennessee’s tax rates to redirect much of the budget surplus from the General Fund to the Highway Fund it also provides the largest tax reduction in Tennessee History.

WHAT DOES THE IMPROVE ACT LEGISLATION DO?

The bill restructures tax rates to provide more funding for our roads. It does so by simultaneously adjusting taxes in both the General Fund and the Highway Fund. The bill cuts the food tax by 20%, the Hall Income tax by 20% and provides funding to build our roads by redirecting the surplus to the Highway Fund.

Is THE LEGISLATION IS JUST A HUGE TAX INCREASE?

That it is not. The Improve Act lowers taxes much more than they are raised by $250 million of dollars.The final bill is both revenue neutral to the state and pocketbook neutral to most Tennesseans.

HOW ARE THE RATES ADJUSTED?

General Fund Tax Cuts = FY17 $293 million or $510 million at full implementation.

WHY NOT JUST TRANSFER THE BUDGET SURPLUS FROM THE GENERAL FUND TO THE HIGHWAY FUND?

The Governor might have done that but then Tennesseans would not enjoy any tax savings, and we would not leverage the taxes that out of state visitors pay. Tennesseans will receive a food tax and Hall tax break and out of state tourists, travelers and truckers will pick up more of our gas taxes. They already pay 1/3 of Tennessee’s gas tax and 1/2 of Tennessee diesel tax.

how much will I save?

The simple formula is that the food tax will reduce by a $1 for every $100 you purchase. The gas tax will increase by 40 cents for every ten gallons you buy. If you pay the Hall Income Tax – it is going away. Under the Improve Act, millions of Tennessean's will save more due to the food tax reduction over the gas tax increase.

user fee concept

Another benefit is that the bill maintains the user fee concept General Fund taxes do not act as user fees as the gas tax does.

Economics of the Bill

"Tennessee has some of the best roads in the country. We have done this with cash – no debt is owed, and we have done this entirely through

a user fee system." Governor Haslam

why can't everything be a user fee?

We don’t charge each parent for their child’s education – it would either be so expensive that most would not be able to send their children to school or fees would need to be kept so low that the quality of education would be extremely poor. We also do not charge each citizen helped by the state police, or else a citizen might decline to call the police and decide to take matters into their own hands. And TennCare, Tennessee’s charitable health program for the poor, charges the smallest of co-pays, or none at all because the enrolled simply have very little means or even no means to pay. This program is an act of mercy on the part of the tax payers.

WHAT IS SO GREAT ABOUT USER FEES?

User fees are a conservative as well as a Republican concept for funding government services. The user fee’s very nature is anti-redistributionist because no one is being taxed to support a service that they do not receive.

Conversely, the more socialist a government the more the government exacts heavy general taxes that tend not to benefit the people who pay the most. The infamous Marxist mantra From each according to his ability to each according to his needs is the reverse of the user fee.

are user fees always used?

The state once tried charging users of state parks but that was very unpopular – no one liked having to bring cash with them to get in the park so the fee was repealed.

However, if you are a hunter, fisherman or boater you pay a user fee through a license. This fee pays for the operations and services of the Tennessee Wildlife Resources Agency (TWRA).

Our state colleges and universities are part user fee (tuition) and part tax payer subsidized through the General Fund. However, not for out of state students – they pay the full cost with no tax payer supported subsidy.

the role of government

The role of government is to do only those things that people or businesses cannot do for or by themselves.

For instance, most cannot build a bridge or a highway, or ensure public drinking water is clean, nor could you likely build a great public university, or coordinate the statewide eradication of the boll weevil.

However, it is also true that not everything in government can be user fee based but as much as can be should be. For instance, K-12 education, the state police and TennCare are good examples of services provided through General Fund subsidy, not user fees.

The gas tax pays for building and maintaining Tennessee’s roads. A true user fee is a toll system but toll systems are oppressive, tiresome and inconvenient.

The gas tax acts as user fee because one cannot drive their car without gas. Therefore, the tax on gas serves to act as a fee for using the roads, and the fee is paid when the gas is purchased. So, if you drive, you will pay for the roads and you pay in proportion to how much you use them. Another benefit of a user fee is that is proportional to use: those who drive little, use the roads less, they also purchase less gas so they pay less tax than those who drive more.

I HAVE READ THAT THE GOVERNOR's FAMILY BUSINESS WILL PROFIT FROM This law.

Not true. This fake news assumes that gas stations would invest the collected tax revenue in order to earn income before the tax is due – making money from the “spread” between the date the gas was sold until the tax is remitted.However, that is not how the gas tax works in Tennessee. The tax is due when it comes over the border and the distributor takes possession of the commodity. When stations collect the tax at the pump, they are only being reimbursed for the tax that they have already paid to the state of Tennessee.

Experts say no.

We asked UT to examine the effect of raising the diesel tax. For every $100 of value on a truck we can expect to see trucker’s cost increase .4 tenths of 1%.

Additionally, trucks traveling interstate may not have purchased their fuel in Tennessee. So again, price will be unaffected.

WHY DOES THE IMPROVE ACT CUT THE FRANCHISE and EXCISE TAXES FACTORIES?

Tennessee has some of the highest franchise and excise taxes in the country, placing us at a competitive disadvantage with other states. The tax is especially harsh for factories the effective rate of the two taxes is 120%. This is because 1 of the 3 factors on which the tax is based weights the value of equipment, buildings and other capital assets especially harshly for asset heavy operations such as factories. As a result, Tennessee is NOT an especially attractive state to expand manufacturing operations nor to establish capital heavy businesses like factories.

AT THE PUMP

The IMPROVE Act increases the tax on gas by 6 cents in increments over a 3-year period.

FY 18 = 4 cents

FY 19 = 1 cents

FY 20 = 1 cents

According to the U.S. Department of Transportation (DOT), a household with two vehicles (the most common number of vehicles per household) travels 23,700 miles per year.

WON'T THE IMPROVE ACT COST TENNESSEE FAMILIES MORE?

As amended, the IMPROVE Act will result in a tax cut for Tennessee families.

See the following examples of the pump and the store

WHY ARE TENNESSEE's GAS AND DIESEL TAXES AN EXCISE TAX?

Excise taxes provide price stability for consumers concerning products whose price tends to fluctuate, such as gasoline. For instance, when gas is $2 per gallon, the gas tax is 20 cents per gallon. However, if the price of gas doubles to $4 per gallon the gas tax is still only 20 cents per gallon. Under a sales tax, a doubling of the price would double the tax.

AT THE STORE

According to the United States Department of Agriculture (USDA), the monthly cost of food at home for a family of 4 equates to the following:

$772 for a low cost plan

$960 for a moderate cost plan

With the IMPROVE Act’s 1 percent reduction in the food tax, a family of 4 would save $7.72 cents per month using the low cost plan and $9.60 per month using the moderate cost plan.

At 21.4 miles per gallon, a household purchases approximately 1,107 gallons of gas per year. The resulting annual increase in fuel cost from the IMPROVE Act for a household equates to the following:

FY 18 = $44.28 or $3.69 per month

FY 19 = $55.35 or $4.61 per month

FY 20 = $66.42 or $5.54 per month

Savings to Tennesseans

When comparing the tax savings from the food tax reduction to the increase in the cost of fuel, the resulting impact of the IMPROVE Act for a family of 4 is a tax savings of at least $2.18 per month and even greater savings in the first two years of implementation. In addition, due to inflation on the cost of food, the value of the tax savings will only increase over time.

Even if a family of 4 spent considerably less than the USDA estimates – as little as $555 per month – the savings from the food tax reduction would exceed the increased expenses at the gas station.

Road Projects in the Bill

HOW DO THE MAYORS KNOW WHICH PROJECTS SHOULD BE ON THE LIST?

Citizens have a lot of influence as to which projects are on the list. By discussing observations with our mayor, he learns information to bring up to the MPO. The chief concerns are road safety and accident data, traffic congestion and new growth which a mayor may learn about through a developer seeking zoning changes or building permits through the city or county government.

WHICH WILSON COUNTY ROAD PROJECTS ARE IN THE IMPROVE ACT?

Nine Wilson County road projects will be funded by the Improve Act totaling $250 million dollars. Six of the nine projects are ready to go.

HOW AND WHEN DID THEY CREATE THIS LIST?

The mayors work together to plan the roads through regional organizations to which each belong by virtue of their elected office. Each organization is either a Metropolitan Planning Organization or Rural Planning organization MPO or a RPO. Wilson County’s mayors belong to the Nashville MPO along with the mayors from Sumner, Rutherford, Williamson and Davidson Counties.MPO’s and RPO’s are federally mandated and funded. Created in 1988 the mayors have been coordinating with each other to plan state road needs since that time.

WHO CREATED THE LIST of road projects?

The road projects on the list were identified by Tennessee’s county and city mayors.

HOW DO THEY DECIDE UPON THE NEEDED PROJECTS?

The mayors meet once a month to discuss their individual local needs. By sharing this information with each other they develop a prioritized list of projects which they give to TDOT to inform the department of our local state road needs. The MPO/RPO’s have staff that work with TDOT to determine cost estimates, and to coordinate with ongoing projects – this is done to develop a time-frame for the projects, and a working plan for the entire region. The list of unfunded projects has been growing for a very long time because Highway Fund revenue has not kept up with our fast-growing state.

HOW WERE THE ROAD PROJECTS IN THE IMPROVE ACT IDENTIFIED?

The road projects in the Act are from a list of unfunded road projects that has been growing for a very long time.

HOW LONG WILL IT TAKE TO BUILD THE PROJECTS?

The estimated build-out of the final amended legislation is 12-15 years. Governor Haslam’s original, unamended bill had an 8 year build-out. The Hawk Plan had a 25 year build-out for the projects which is largely why it was rejected.

ARE ALL OF THE ROAD PROJECTS IN THE IMPROVE ACT ACTUALLY NEEDED?

Rep. Lynn feels strongly that ALL of Wilson County’s road projects in the Improve Act are very needed. In fact “we need more that are not on the list such as widening Lebanon Rd from Bender’s Ferry to Hwy 109, S. Mt. Juliet Rd. from Central Pike to the county line and Central Pike from S. Mt. Juliet Rd. to Hwy 109. Each of those projects would likely cost about $65 million dollars.”

Financial Questions

DOESN’T TENNESSEE HAVE A LARGE BUDGET SURPLUS?

Yes, right now Tennessee has a fairly large $1.9 billion budget surplus $1.1 billion dollars is non-recurring revenue that is in the treasury, and approximately $800 - $900 million is estimated recurring revenue likely to be received in the upcoming fiscal year FY18.

EXPLAIN THE BUDGET SURPLUS.

The bulk of budget surplus is from spending cuts produced by the hard work of the state employees due to the LEAN Six Sigma practices brought to state government by Governor Haslam Through various projects the state employees achieved huge savings which in June 2017 took the state Treasury by surprise when state departments turned in $511 million dollars of unspent funds.

WHAT IS MEANT BY NON-RECURRING AND RECURRING REVENUE?

Non-recurring revenue is one-time tax money that Tennessee received that we will not receive again – the funding does not recur. Recurring revenue is tax money that we can reasonably expect to receive now and into the future.Non-recurring revenue cannot be used to fund recurring expenses. Recurring revenue is used to fund recurring expenses.

I STILL DON’T UNDERSTAND…EXPLAIN THE SURPLUS IN MORE DETAIL.

Tennessee’s budget year starts July 1 and runs through June 30. The Governor and the state departments work on the next year’s state budget all fall, and the Governor presents the budget to the General Assembly in February.

After that, the General Assembly’s House and Senate Finance Committees spend weeks in meetings examining the budget and questioning the state departments and the Governor’s staff. Differences of opinion are soon resolved, and the General Assembly votes to approve a final version of the budget around the middle of April each year.

However, because the General Assembly had passed the 2017 budget in mid-April – the 2017 $511 million dollars was not known at the time of passage, and so because it is unspent, we expect that on June 30, 2017 another $511 million will also be returned to the treasury unspent due to the efficiencies created by the FY16 LEAN projects. Together, the FY16 and FY17 LEAN savings is $1.1 billion.

As well as Tennessee’s economy is doing, the $1.1 billion dollar surplus is not due to economic growth but due to savings produced by the LEAN government projects. This $1.1 billion dollar savings is considered non-recurring revenue for budgeting purposes. This same amount will also be available in the FY18 budget going forward as recurring revenue.

On June 30, 2017, the end of the 2016 budget year, the state departments returned $656 million to the state treasury of unspent tax revenue. The large sum was due to some small adjustments to fund accounts, some lawsuits that Tennessee had won and received payment but the vast majority, $511 million, was from LEAN Six Sigma projects the state departments had completed which produced huge reductions in spending. This meant a surplus of $656 million was left over from the 2016 budget year, but it also meant that another $511 million in savings would also be available in the 2017 budget year.

YOU EXPLAINED THE NON-RECURRING SURPLUS BUT WHAT IS THE RECURRING SURPLUS?

The recurring surplus is the surplus that will go forward into the future. The $511 million savings derived in FY16 and achieved again in FY17 from the LEAN projects, will also be available for the FY18 budget and going forward until it is budgeted. This year we will both spend and give back this money to taxpayers by reducing taxes through the Improve Act.

The rest of the recurring surplus comes from an estimate of economic expansion for FY18 of 3.17% or $366 million, and also from some fund adjustments of $79 million.

WHY CAN'T WE JUST USE OUR LARGE BUDGET SURPLUS TO BUILD THE NEW ROADS?

2. We are using some the surplus for the Improve Act. $120 million will pay TDOT the last of the money that was borrowed in the 2000’s, and $300 million will kick-off the Improve Act.

3. Roads are not the only needed projects in Tennessee. Through the Sundquist and Bredesen years state buildings which are important assets of the state, were sorely neglected. Governor Haslam would like to spend 56% of the non-recurring revenue to repair these assets and 8% of the recurring surplus to create a capital maintenance fund so that future maintenance is budgeted and this issue will never occur again. In addition, ordinary growth and inflation in TennCare, the Basic Education Program, funding the 10% of unfunded state retirement benefits, cost increases in state employee insurance and raises will consume 74% of the recurring revenue. He would also like to put another $100 million in the rainy day fund of the non-recurring revenue.

4. We don’t need the entire $10.5 billion right now or even $2 billion right now because not all of the projects are ready for construction. The projects are in different phases of planning from design, to permits and right of way acquisition. Further, even if every project was ready to be built in FY17, there isn’t enough skilled labor or raw materials available in a single year to build that many additional projects.

WHICH PROJECTS ARE READY TO BE CONSTRUCTED?

HOW MUCH OF THE BUDGET SURPLUS IS BEING USED TO BUILD THE ROADS?

More than $120 million of the non-recurring revenue will go to the Highway Fund to pay back the remaining money that was taken from TDOT’s budget in the 2000’s to balance the budget.

More than $300 in recurring funds will be used to provide tax cuts to Tennesseans in the general fund and rates will be raised in the highway fund effectively reassigning the surplus to the Highway Fund through tax restructuring.

HASN’T THE GENERAL ASSEMBLY TAKEN MONEY FROM TDOT OVER THE YEARS?

Not routinely. Revenue growth was lean during Governor Bredesen’s time in office, and although he had to make huge cuts to TennCare and other programs to balance the budget at times cost cutting still wasn’t enough. In one budget year he took almost $300 million dollars from TDOT funds to balance the budget.

In the FY17 budget the general assembly finally paid back half of the remaining debt. The FY18 budget will pay back the remainder from the non-recurring surplus revenue.

I HAVE HEARD THAT THE STATE DOES NOT USE ALL OF THE HIGHWAY FUND TAXES FOR THE ROADS – WHY SHOULD WE GIVE THE STATE MORE MONEY?

That is fake news. The distribution of each of the Highway Fund taxes was initially designed as they are currently distributed. Neither the Governor nor the General Assembly has done anything underhanded to redistribute this money.

The chart below illustrates each tax in the Highway Fund, how it is distributed and why.

The money in the General Fund column goes to the Department of Revenue, Dept. of Agriculture, Dept. of Education and Higher Education and to various charities.

Completely in line with the "User Fee" concept, the each tax law pays the Dept. of Revenue for collecting and accounting for the tax up to 2% of the total collected. Note that Revenue's expenses for the collection and accounting rarely total 2% as you will see in the chart.

Gasoline Inspection Tax is derived from the state weights and measures program. After the Dept. of Revenue is reimbursed for their expenses, the remainder of the Gasoline Inspection Tax in the General Fund reimburses the Dept. of Agriculture for their expenses to carry out the state weights and measures program. This tax is paid for by the suppliers - the Department of Agriculture does the inspections and sends samples to a third-party test lab to check octane and for other compounds.

Motor Vehicle Registration Tax is derived from the registration of motor vehicles and from the charitable specialty license plate program. After Revenue is reimbursed for their expenses the remainder of the Motor Vehicle Registration Tax in the General Fund is only that portion that was collected from drivers who purchased a charitable specialty license plate - Revenue sends the various charities that sponsored a specialty plate a check and money also goes to the Education Fund because the Department of Education and two of our state universities also have specialty plates.

The money in the Debt Services Fund column is an accounting necessity of GASB – a reserve - this money is never spent but must be reserved in case the state falls short and cannot meet the obligation of all of the outstanding TDOT contracts.

The money in the Cities and Counties column is their share of the collected taxes.

DOESn'T THE BUDGET SURPLUS MEAN THAT TENNESSEANS ARE OVER TAXED?

The surplus was gained through improving department processes, policies and through gaining efficiencies that reduced spending. This was done using LEAN Six Sigma Projects the surplus is savings achieved through achieving efficiencies which helped the departments to spend less not due to economic growth.

​So what the IMPROVE Act does is lower tax rates to reduce collections instead of spending the savings that was gained.

WHAT IS LEAN SIX SIGMA?

Six sigma is a set of analytical processes designed to improve business efficiency. The techniques vary - many are for manufacturing however application of the techniques have broadened to government in the last 10 years.

​LEAN is a management system to systematically eliminate waste.

LEAN and Six Sigma work together nicely in government settings to make government processes, use of space and even law and rules more efficient.

WON'T THE IMPROVE ACT VIOLATE HER PLEDGE?

Each year Rep. Lynn signs the Americans for Tax Reform Tax payer protection pledge where she promises not to raise taxes. Doesn't the IMPROVE Act violate her pledge.

No. Rep. Lynn has never voted for a tax increase, and she signs the Taxpayer Protection Pledge every year. The Americans for Tax Reform reviewed the bill and because bill is merely a restructuring of Tennessee's tax rates and the tax reductions exceed the tax increases, ATR sent the legislators a letter confirming that the bill does not mean that they have raised taxes and that they will not violate their pledge by voting for the bill.